Hedge Fund Tycoon Calls for Ballmer to Exit Microsoft

Billionaire hedge fund tycoon David Einhorn called for Steve Ballmer’s ouster from Microsoft Thursday. Speaking at the annual Ira Sohn Investment Research Conference in New York, Mr. Einhorn said that Microsoft had wasted money in some of its business acquisitions, allowed Apple to steal a competitive lead, and that Mr. Ballmer himself was “stuck in the past.”

Steve Ballmer showing off HP’s Slate tablet during CES 2010

If you don’t follow Wall Street, you can be forgiven for asking why you should care what some billionaire has to say about who runs Microsoft, but Mr. Einhorn has grown rich from what sometime seem to be prescient investments and predictions, and his opinion carriers enough weights to have helped push shares in Microsoft higher by 1.98% Thursday after he made his comments.

Mr. Einhorn’s fund, Greenlight Capital, made billions by shorting Lehman Brothers before the onset of the financial crisis that was eventually kicked off with the collapse of the same Lehman Brothers. In December of 2010, he invested heavily in Sprint because of that company’s spectrum holdings. Since then, shares in Sprint are up about 40% (note that this reporter holds up a small stake in Sprint picked up after Mr. Einhorn made his comments).

Other seemingly prescient moves include being long on Apple. In July of 2010, his firm bought millions of shares at an average price of US$248 per share, and the stock closed Thursday at $335 per share.

The long and the short of it is that there are people that pay attention to what Mr. Einhorn does and says about his investments. Whether or not that will include Microsoft’s shareholders remains to be seen.

Mr. Einhorn is one of those shareholders, too. Greenlight Capital has a $230 million stake in MSFT, owning approximately 0.11% of the company, according to The Guardian. He is still bullish on the company, stating that he believes the company is trading at a discount, but he called for changes starting at the top.

The crux of his argument is that Microsoft has missed many opportunities under Mr. Ballmer’s tenure. To compound the error, according to the investor, once Microsoft had missed those opportunities, it then wasted billions of dollars in resources trying to R&D its way into catching up.

“[Mr. Ballmer] has allowed competitors to beat Microsoft in huge areas, including search,” the analyst said. “Even worse, his response to these failures has been to pour tremendous resources into efforts to develop his way out of these holes.”

He called Bing a “sinkhole,” noting that Microsoft’s online services business lost $700 million last quarter, and he criticized Mr. Ballmer’s dismissal of the iPhone or iPod as a threat to Microsoft. He also criticized Mr. Ballmer’s decision to forbid his children from using Google or iPods, saying the move demonstrated that Mr. Ballmer was out of touch.

He went so far as to describe Mr. Ballmer’s leadership of what used to be the world’s biggest technology company (by valuation) as “Charlie Brown management.”

Steve Ballmer took over the helm of Microsoft in 2000, after Bill Gates resigned from the position to become Chief Software Architect and Chairman of the Board. Since then, Mr. Gates has devoted increasing amounts of his energy and focus to his foundation, The Bill & Melinda Gates Foundation, and Microsoft’s stock has largely languished.

Shares in MSFT ended the day at $24.67, up $0.480 (+1.98%), on heavy volume of 78 million shares trading hands. In calendar 2011, the stock has fallen 5.2%, counting today’s gains.

At the same time, and in fairness to Mr Ballmer, I think some of the expectations about what MS should be doing are unrealistic, and are based on fallacious reasoning.

Specifically, just because at one time MS and Apple competed for PC marketshare, which MS came to overwhelmingly dominate, masks real differences between what those companies contributed to that competition, and the types of businesses that they are. It’s not simply that the companies have different business models - which they do - but that they are, in fact, very different companies engaged in very different businesses, with very different products and skillsets. In the PC war, MS made software that it licensed to third party hardware manufacturers; Apple made hardware along with an OS as a marketing aid and not a standalone product. Other than that both ultimately were trying to shape and dominate the PC market, nothing else about these companies was directly comparable.

Therefore, if Apple enters another market (music players, online store, entertainment, phones, tablets, etc), a belief that MS should likewise enter and then dominate any or all of those sectors with a similar marketshare lead is a non sequitur. If anything, the increasingly disparate trajectories of these two companies underscores their very different natures, skill sets and contributions to their respective industries. I would argue that these two companies are clearly no longer in direct competition, if they ever truly were.

MS and their investors only believe they should be in the music, phone or tablet, online or retail store business because Apple is. This is corporate misdirection and conceit. It would be as if you beat someone in a piano recital, you should therefore beat them at music composition, a ju-jitsu tournament, an architectural design competition and a motocross race - despite the fact that you’ve not trained in any of these areas, and they have. What have any of these to do with piano playing? And what would this say about one’s self appraisal?

What MS need is focus. They need a sober assessment of their strengths and assets, in the context of where the industry (however defined) is going, and what role do they envision for themselves in that future. They then need to design a strategic plan for getting there, and to husband the resources to make it so.

Simply changing MS’s leadership (CEO only) is unlikely to achieve this. Such a shift more likely requires a change in corporate culture and a wilful collective effort - with or without Mr Ballmer at the helm.

Yes, I realise that MS made a tablet before Apple did, and played around with a mobile OS. But they were never any good at it, and these never set the industry alight. I believe that, but for the fact that Apple re-interpreted these things, made them their own and then came to dominate those markets in profit and/or market share, MS would have quietly let these die. Instead, Apple’s success galvanised popular and corporate opinion that MS should have done it and then dominated it.